Question

2. Tiare’s city tour company is situated in the highly seasonal town of Moorea where the number of visitors fluctuates greatly from month to month. City tours are very competitive in this

town and Tiare is a price-taker. Her monthly fixed cost is $2,000. Her variable costs are:

Quantity of tours per month               Variable cost

100                                                      $700

200                                                      $1500

300                                                      $2400

400                                                      $4000

500                                                      $5800

600                                                      $7800

Since Tiare is a price-taker, she must charge what everybody else in Moorea’s market charges. The market price varies from month to month as shown below.

Month             Market Price

January            $5

March              $5

May                 $15

July                 $19

September       $19

a. Give the profit-maximizing output of this firm and calculate its profits in each of these

months. Hints: MC = dVC/dq = dTC/dq. You need to find an output decision and profit for each month since market price changes depending on what month it is.

Please make a table with the following columns: Output (quantity), VC, MC, AVC. Once you have that information make another table showing the output decision for each month (i.e., one column for month, one column for price, one column for output). Next calculate the firm’s profit. Make another table with the following columns to facilitate your profit calculation: Month, price, output, revenue, cost, profit.

b. Will firms enter or exit this market in the long run?

c. How will the firm’s output decisions differ if fixed cost were $1000 per month?

Answer 1